Recession 2008 (Part III): Where is the problem?

Let’s first take a few moments to think about how the current economic crisis affected this representative individual.

Person was laid off. Why? - because her employer fired her.
Why did her employer fired her? -because there was no demand of his products in the market.
Why was not there demand of his products? -because consumers lost their income.
Why people lost their income? -because they were laid off.


Deeply ponder over the chain- it ended at the point where it started . This is a very simple example, but this is the way the economy runs. Certainly, there must be a disturbance somewhere in this chain of economic system that created this mess. There is no doubt that in order to hit right on the problem, we need to identify where the problem started and make the economy run smoothly. This disturbance may come either from malfunction within the system or from outside as an external shock, and this is what has been a very challenging task for policymakers.

The chain can be explained in different way. According to national income accounting system, the Gross Domestic Product (GDP), a country’s total production of goods and services, is measured in three different ways: spending approach, income approach and production approach. In principle, all these three measures must equal each other. What this means is that people spend (spending approach) their income (income approach) to purchase products (production approach) in a balanced system. The entire system moves up and down during different phases of business cycle, which means that if one sector is hit, other sectors react accordingly affecting entire system but keeping it in balance. The problem now is how to identify what created the imbalance in the system. This must be on the center of research about how business cycle is created, and on due course we possibly need to change the way we measure GDP in traditional methods.